Support and Resistance
One of the most basic concepts in technical analysis is that of support and resistance — the price levels from which a market repeatedly rebounds (support) or declines (resistance) (Example 3.1).

Specifically, a support level exists where demand for a particular FX instrument consistently surfaces and buyers enter the market — where buyers feel that "the price is right." Speculative buying also often develops at this level because it’s where a market has previously found support. Resistance is just the opposite. It’s a price level at which supply becomes more readily available from holders of a FX instrument, and where speculators often decide that it’s time to sell. Technical analysts draw
horizontal lines connecting support and resistance levels and extend the line on the chart to indicate where prices might find support and resistance in the future (Example 3.2).

Support and Resistance Levels

Support and resistance levels form quite often and tend to be self-reinforcing: The longer support or resistance levels stay in place the stronger they tend to become. This is because traders attach more importance to them and react accordingly; buying at support and selling at resistance, providing further reinforcement. As a result
some support and resistance levels last for months, even years. Others don't last long at all, literally just for minutes, and are only apparent on very short-term bar charts. If prices become trapped between a support and resistance level, the market is in what is called a trading range, exhibiting no long-term direction.

From a trading standpoint, violation of a support or resistance level can indicate that a significant price move has begun, most likely because the fundamentals or trader sentiment have changed. As such, it usually attracts a lot of attention from traders, and is an occurrence that causes everyone to stand up and take notice (Example 3.3).

Even after a market has "broken out" of a range and moved above resistance or below support, those levels can still have an impact. Sometimes they reverse roles. An old resistance level becomes a new support level, and vice versa. The reason is simple. Traders who missed the breakout view a retracement to that level as a reprieve, an opportunity to close out losing positions or establish new ones in the direction of the breakout (Example 3.4).